Introduction
“The message stays clear. When any company circumvents the rules of fair play and honest competition by making improper payments to win business, it will face a strong and united front from law enforcement around the globe” - Linda Thomsen, Director of the Division of Enforcement at Securities and Exchange Commission (SEC)1.
Siemens Aktiengesellschaft (Siemens), one of Europe’s largest engineering companies, has offered to pay a total of $1.6 billion (€1 billion) in disgorgement and fines to settle the largest corporate corruption investigation in history.
This settlement is the highest amount ever paid by a company to resolve corruption related charges and follows major corruption investigations relating to bribes made to officials to win potential contracts.
As well as reputational and vast financial costs (including an estimated €850 million in legal and accountancy fees2), several former board members and employees of Siemens are under criminal investigation. Siemens itself is likely to bring damages actions against 11 former executives for failure to maintain sufficient internal anti-corruption controls. These investigations remain unaffected by the settlement.
Background
‘Investigations originated in Milan. An in-house investigation (following a whistle blowing complaint) by Italy’s state-controlled Enelpower SpA in 2003-2004 uncovered bribes paid to Enel SpA by Siemens (and other companies) to win a subcontract for gas turbines at Enel plants in Abu Dhabi, Oman and Qatar. In subsequent proceedings a Milan court found that Siemens’ corruption problem was systemic, imposing a fine of €500,000 and ordering Siemens to pay €6.1 million of its profits to the Italian government.
In parallel to the events unfolding in Milan, a group of bank auditors tracing laundered assets suspected to be linked to terrorist financing discovered a money trail leading to Siemens. These investigations uncovered slush fund accounts where individuals had siphoned off money from the Communications (Com) Group of Siemens via off-shore companies and their own account in Switzerland and Liechtenstein.
These events triggered investigations into Siemens in Germany and Liechtenstein by local prosecutors.
Siemens’ Munich headquarters and the homes of 30 executives were raided by the police in November 2006. The raid, and subsequent investigations, uncovered billions of dollars worth of suspicious transactions made in connection with contracts for which Siemens was unable to establish a valid business purpose. These transactions raised particular concerns under the Foreign Corrupt Practices Act 1977 (FCPA) and triggered a worldwide corruption scandal and investigations in a number of additional countries3.
The investigation of Siemens involved an unprecedented level of coordination of law enforcement efforts by authorities around the world to address the alleged violations of anti-bribery laws.
US authorities
Due to Siemens’ listing on the New York Stock Exchange, the SEC enforcement division and the Department of Justice (DOJ) began formally investigating Siemens’ suspected criminal violations of US law in connection with the various bribery investigations in other jurisdictions in 2007.
In the SEC’s action, it was alleged that between March 2001 and September 2007, Siemens violated the FCPA “by engaging in a widespread and systematic practice of paying bribes to foreign government officials to obtain business” and, in addition “created elaborate payment schemes to conceal the nature of its corrupt payments”.4
It is alleged that Siemens’ pattern of bribery was “unprecedented in scale and geographic reach”5 with $1.4 billion in bribes to government officials worldwide to secure amongst others: Venezuelan transportation contracts, Israeli power-plant contracts and Russian traffic-control systems contracts. Importantly, Siemens’ internal controls and corporate culture were perceived as conducive to such misconduct by employees at all levels within the organisation and at odds with the FCPA.
German authorities
Following the November 2006 police raid, the German authorities began investigating Siemens for bribery, embezzlement and tax evasion.
Five executives associated with the former Com Group were arrested on charges of bribery and embezzlement.
In October 2007, the Munich district court imposed a fine of approximately €201 million for the bribery of public officials in Russia, Nigeria and Libya in 77 cases by a former manager of the Com Group.
Additionally in October 2007, Siemens reached a final settlement with the German tax authorities regarding the deductibility for tax purposes of certain payments at the Com Group and Siemens AG with respect to fiscal 2000-2006 whereby Siemens accounted for an extra €350 million in income tax charges and €28 million in related interest charges.
US settlement
On 15 December 2008, Siemens pled guilty in Federal Court to charges of knowingly circumventing and failing to maintain adequate internal controls and failing to comply with the books and records provisions of the FCPA.
In addition, Siemens has agreed to pay a $450 million criminal fine to the DOJ and a $350 million civil fine to the SEC. Although the fine paid to the DOJ is the largest ever criminal fine in FCPA enforcement, it is a much smaller amount than analysts and investors had originally estimated and, following the announcement, it was reported that Siemens’ shares gained 4.5 per cent.6
Siemens has also agreed to retain an independent monitor, former German finance minister Theo Waigel, for at least four years who will report to the US authorities on Siemens’ progress in implementing and operating its new enhanced compliance controls. Waigel was recommended by Siemens and is the first non-US national appointed to serve as compliance monitor.7
Independent or ‘external’ monitors are featuring more in deals to avoid criminal charges by scandal-plagued companies with authorities as they give prosecutors a way to ensure businesses keep their promises and ‘get their houses in order’. They can be very costly and represent a further significant financial burden.
German settlement
Also on 15 December 2008, Siemens agreed to pay a €395 million (approx $569 million) fine to the Office of the Prosecutor in Munich to resolve an on-going bribery investigation in Germany alleging the failure of the former Managing Board of Siemens to fulfil its supervisory role.
This is in addition to previous fines of €238 million (of which €201 million was to the Office of the Prosecutor in Munich in October 2007) and tax charges.
Legal action against Siemens’ employees
Prior to the settlement on 15 December 2008, legal action was taken against several former Siemens employees.
Kley and Vigener
In May 2007, Andreas Kley, an ex-finance chief at Siemens, and Horst Vigener, a former consultant, were convicted by the regional court in Darmstadt on charges related to payments of €6 million (effected through Liechtenstein accounts) to managers of two Enel SpA units to win two gas turbine orders worth €450 million between 1999-2002.
Kley was given two years on probation for bribery and breach of trust and was ordered to pay €400,000 to charity. Vigener was sentenced to nine months’ probation for assisting bribery.
In the same proceedings, Siemens was ordered to disgorge €38 million in profits. However, in August 2008, the Federal Court of Justice quashed the court ruling stating that the conviction for bribery (and the €38 million fine) should be lifted because bribing companies outside Germany was only made a crime in 2002 and the payments in question were made in 2000.
Schelsky and Feldmayer
In February 2007, Wilhelm Schelsky was arrested and accused of tax offences. A month later, Johannes Feldmayer was arrested on suspicion that he bribed Schelsky in relation to a consulting contract the two signed. Feldmayer was released on bail in the form of a €5 million bond issued by a bank, €4.5 million guaranteed by Siemens. Feldmayer’s arrest warrant was later revoked and the bank bond was released.
In November 2008, a state court sentenced Feldmayer to two years probation and imposed a fine of €229,000 for breach of trust and tax evasion. Prosecutors had sought a three-and-a-half year prison sentence. Schelsky received a prison sentence of four-and-a-half years for charges of aiding breach of trust with fraud and tax evasion. Prosecutors had sought a six-year prison sentence.
Conclusion
The scale of the Siemens’ international bribery and corruption scandal highlights the importance of not merely implementing, but also maintaining, sound ethical business conduct in everyday business behaviour to avoid expensive litigation suits, irreparable damage to business reputation and client relations, employee morale and a significant diversion of both management and financial resources.
The impact of the Siemens investigation, and consequent fall out, on the corporate landscape in Germany and beyond has already been significant. Siemens influence is likely to impact further the corporate landscape as we can expect to see it seeking to impose strict ethical standards on its counterparties, agents and joint venture partners. There is a parallel here to be drawn with BAE’s actions following the publication of the Woolf Committee Report on BAE in May 2008.
It will be increasingly important for corporates in this new landscape to have some form of external assurance. One can expect that Siemens will be considering this carefully following this settlement.
Finally, the appointment of the monitor over Siemens affairs for up to 4 years is part of an emerging trend which we can expect to see imposed by prosecuting authorities across the world. External monitors have been a controversial feature of US settlements for some time. In October 2008 Balfour Beatty’s settlement with the UK Government included an external monitor and it is likely that any future settlement in the UK between the SFO and other corporates will follow this trend.
